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In-Line Earnings at Mondelez; Sales View Cut - Analyst Blog

Mondelez International, Inc
. (
MDLZ
) reported dismal third-quarter 2013 results, managing to meet
the Zacks Consensus Estimate for earnings but missing the same
for revenues due to weak performance in China. The maker of Oreo
cookies and Cadbury chocolates also lowered its organic revenue
guidance for 2013 as the present headwinds are expected to
continue.

Mondelez's third-quarter adjusted earnings of 41 cents per
share were in line with the Zacks Consensus Estimate. Adjusted
earnings, however, increased 13.9% from the prior-year quarter
driven only by lower taxes while revenues and margins continued
to be sluggish. Earnings grew 16.7% on a constant currency basis.
Currency hurt earnings by a penny.

Mondelez International, previously known as Kraft Foods, Inc.,
spun off its North American grocery business in to a separate
independent company,
Kraft Foods Group
(
KRFT
) in October last year.

Mondelez International focuses on the global food and snacks
business of the old Kraft Foods. It markets products in food
categories like chocolates, biscuits, gum, candy, coffee and
powdered beverages.

Revenues Still Soft

Net revenue in the quarter increased 1.8% year over year to
$8.47 billion. Revenues missed the Zacks Consensus Estimate of
$8.55 billion by almost 1.0%. Currency headwinds hurt the
quarter's revenues by 2.8 percentage points (pp) as a significant
portion of Mondelez's sales are generated outside the U.S. Global
category slowdown (particularly in emerging markets), weak
biscuit sales in China and lower coffee pricing hit the top
line.

Organic revenues (excluding impact from acquisitions,
divestures and foreign exchange) increased 5.3% driven entirely
by volume mix gains of 5.3%. Organic top-line growth was below
the company's expectations of 6%, though it was better than the
first two quarters of 2013.

Volume/mix gains were driven by growth in emerging markets and
market share gains. Pricing was flat in the quarter largely due
to the impact of lower coffee prices. Lower coffee prices
adversely affected top-line growth by around 0.5 pp. Coffee
pricing is expected to hurt the top line similarly in the fourth
quarter as well as in the first half of 2014.

Revenues from emerging markets were up 10.7% as strong
performance in Russia, India and Brazil made up for weakness in
China. Revenues declined in double digits in China due to
economic slowdown and weak biscuits performance. On the other
hand, revenues in developed markets grew 1.8% as North America
and Europe performed well in the quarter.

Among the food categories, biscuits and chocolates were up in
the quarter, while the gum/candy and coffee businesses were down.
The company's gum business has been down since the last few
quarters, mainly in the developed nations.

Mondelez's Power Brands grew 6.9% in the quarter driven by
brands like Tuc, Club Social, belVita and Barni biscuits and
Cadbury Dairy Milk, Milka and Lacta chocolates.

Margins Unimpressive

Adjusted gross margins declined 50 basis points (bps) in the
quarter to 37.3% as gains from volume/mix and productivity
improvement were offset by headwinds from higher input costs.

Adjusted operating income increased only 0.8% year over year
to $1.07 billion on a constant currency basis. Adjusted
operating margin declined 80 bps to 12.2% in the quarter due to
difficult year-ago comparisons and higher spending for
advertising, consumer support, sales capabilities and
route-to-market expansion in emerging markets. However, operating
margin grew sequentially due to improved productivity and cost
control.

AsiaPacific:
Revenues declined 7.5% to $1.14 billion, hurt largely by currency
headwinds of 7.6 pp. Organically, revenues were almost flat as
volume/mix gains were offset by lower pricing. High-teen growth
in India was offset by double-digit decline in China, due to weak
biscuits performance. In China, the company lost significant
market share of second-tier biscuit brands as it shifted
marketing spending to Power brands. Biscuit revenues in China are
expected to remain soft in the fourth quarter. The chocolate
category was strong in Asia Pacific gaining from new capacity
additions.

Eastern Europe, Middle East & Africa:
Revenues grew 7.0% to $948 million. Organically, revenues
increased 13.0% as volume/mix gains were offset by lower coffee
and chocolate pricing mainly in Russia. Russia grew in high teens
despite the pricing pressure due to strong volume/mix performance
and easy comparisons. Ukraine, South Africa and West Africa also
did well in the quarter.

North America
: Revenues grew 1.0% to $1.79 billion. Organically, revenues
increased 2.4% driven by solid biscuit and candy sales in the
U.S. However, the gum business continued to decline.

2013 Revenue Outlook Lowered

Mondelez lowered the 2013 outlook for revenues but raised the
same for earnings.

For 2013, Mondelez expects its organic top line to grow
approximately 4%, lower than prior expectation of growth at the
lower end of its long-term range of 5%-7%. Slower global category
growth, lower coffee pricing and weak China sales led the company
to lower the guidance. These headwinds are expected to persist in
the next year as well, thus pressurizing the top line.
Accordingly, revenue growth next year is expected in the 4% to 5%
range, also lower than the long-term target.

The company expects constant currency earnings in the range of
$1.57 to $1.62, higher than prior expectations of $1.55-$1.60 per
share. The guidance was increased only due to expected tax
benefits. Currency headwinds are expected to be 5 cents per
share. Adjusted operating margin is expected to be approximately
12% for the full year.

Fourth-Quarter Outlook

In the fourth quarter, net revenue is expected to decline in
low single-digits. Organic revenue growth will only be about 3%,
much lower than previous expectations due to lower coffee prices,
slower global category growth and continued weakness in China.
Operating margin is expected to be above 13% in the fourth
quarter.

Mondelez carries a Zacks Rank #3 (Hold). The company has been
under pressure and has reported disappointing results since it
split from Kraft Foods. Activist investor, Nelson Peltz has been
pushing
PepsiCo, Inc.
(
PEP
) to take over Mondelez. Another food company that is struggling
with the top line since the past few quarters is
Kellogg Company
(
K
), hurt by its choppy cereal business.

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